expand so paths are visible
(look for unnecessary paths outside the area and delete them)

select all and copy to a new layer

locked original layer

paste in place on the new layer duplicate layer

pathfinder->unite

effect->path->offset path

Object->Expand Appearance to get rid of more little bits in the shape

pathfinder->unite again to be sure only a single solid bounding shape

change fill colour to inspect for bits, (notice you may knock out the fill and only a cutline remains)

Inspect and try again trashing paths that interfere until a good solid bounding shape

Trouble?

During the live trace, an extra path may be encircling the whole, ungroup the paths, and trash the extra paths while drilling down in the layers tab.

Object->Ungroup to be able to select paths

Change fill colour after pathfinder unites

Round corners during path offset

II. Add the cloud outline

Instead of rearranging the two layers, unlock the original layer and “drag down” the top layer to the original layer as another object (takes practice), watch the video at 2:28 for how/where the pointer grabs the top layer to drag onto the original layer (the little “selector square” lights up on the right when you drag the coloured sure from one layer to the little sector sure in the next layer. If you do it right it is a “undo move selected” in the edit undo menu